Few warning signs on sovereign debt

Rich and poor nations alike have piled on debt in the past decade. Investors and analysts don’t see a crisis coming.

Repeated false alarms about debt-related crises in advanced economies such as Japan, the U.S. and the U.K. have left many investors and analysts increasingly skeptical of the idea that burgeoning sovereign-debt piles in those nations pose a major threat to markets.

Government debt levels around the world surged in the wake of the financial crisis as economic growth and private borrowing slumped. But the perception of risks has shifted, with investors seemingly satisfied that the rich countries which print their own currency have practically no risk of defaulting, unlike those which issue in a foreign denomination or a shared one, such as the euro.

“People have learned their lesson from that. Most people don’t bring it up any more for the countries that control their own currencies,” said Sri Thiruvadanthai, director of research at the Jerome Levy Forecasting Center.

Central-government debt-toGDP ratios already likely have peaked in the of the Group of Seven economies, according to the International Monetary Fund. Growth has improved in those countries in recent years, which has raised revenues and reduced the need for government spending.

The U.S. government stands out, however: Across the IMF’s five-year fiscal forecast, the U.S. is one of the few advanced economies in which the IMF expects central-government debt to increase relative to its economy, lifted by tax cuts and increased fiscal spending.

“You really have three types of government bonds: the developed world that prints its own money, and then the eurozone where countries don’t print [their] own money where you have credit risk, and emerging-market bonds which also have inflation risk,” said Eric Lonergan, a portfolio manager at M&G Investments in London.

Some debt watchers still see the U.S. accumulation as a troublesome development. “Rising debt service and the increase in Treasury issuance to fund expanding annual federal budget deficits and debt is [are] likely to crowd out private investment,” said Dana Peterson, economist at Citigroup, who added that effect is likely to be more visible from 2020 onward as economic growth slows.

Other factors, such as a rise in inflation, also pose a risk for debt investors. “If you get a tight labor market and wages start to gallop, you can see inflation pick up. In some countries like the U.S. and Japan, we’re near that point,” added Mr. Thiruvadanthai.

From the financial crisis to the middle of 2016, benchmark borrowing costs for such governments around the world fell, many to record lows. Yields have since picked up, but with little sign of panicked or distressed market activity.

Finance ministries around the world have used the period since the crisis to lock in low interest rates for longer periods of time. The average bond listed on the ICE Bank of America Merrill Lynch Global Government Index matures in about 9½ years, up from around eight years at the turn of the crisis.

In Europe, political developments in 2018 have made it clear that the underlying fragilities seen during the eurozone debt crisis weren’t eliminated when the European Central Bank began its quantitative-easing program in 2016.

Italian government-bond yields shot higher when the country’s election in March produced an unexpected governing coalition by two populist parties, formalized in June.

Proposals have been floated by the European Commission for ways to end the risk of selloffs in European government-debt markets, which in the past has threatened banks, as they are some of the largest owners of those bonds. One such proposal, the European Safe Bond, would package eurozone government debt together into joint securities.

But so far, such proposals don’t have broad political support among eurozone nations, leaving the bloc’s bond markets as a potential flashpoint for any political stresses in 2019.